What is an IPO?
Understand how companies go public and how you can invest in their first day on the stock market.
Quick Answer
An IPO (Initial Public Offering) is when a private company sells its shares to the public for the first time, becoming a publicly-traded company. This process is also called "going public." For example, when Airbnb had its IPO in December 2020, anyone could buy Airbnb stock for the first time. Companies do IPOs to raise money for growth and allow early investors to cash out.
How an IPO Works: Step by Step
Company Decides to Go Public
The company's board decides it's time to raise capital by selling shares to public investors. They hire investment banks (underwriters) like Goldman Sachs or Morgan Stanley to manage the process.
File with the SEC
The company files an S-1 form with the Securities and Exchange Commission (SEC), disclosing financials, business model, risks, and how they'll use the IPO money. This becomes public information.
Roadshow & Price Setting
Company executives travel to meet big institutional investors (pension funds, hedge funds) to pitch the business. Based on investor demand, underwriters set the IPO price range.
Shares Are Allocated
The investment banks decide who gets shares at the IPO price. Big institutional investors usually get priority. Retail investors can sometimes participate through their brokers.
First Day of Trading
The stock begins trading on an exchange (NYSE or NASDAQ). The opening price is often higher than the IPO price due to high demand. Anyone can now buy shares on the open market.
Lock-Up Period
Company insiders (founders, early employees) can't sell their shares for 90-180 days. This prevents them from flooding the market and crashing the price immediately after the IPO.
Famous IPO Examples
Airbnb (ABNB)
December 2020IPO Price: $68 per share
First-day close: $144.71 (+113%)
Amount raised: $3.5 billion
Despite the pandemic hurting travel, Airbnb's IPO was a massive success. Early investors who bought at $68 more than doubled their money on day one.
Coinbase (COIN)
April 2021Reference Price: $250 per share (direct listing, no IPO price)
First-day open: $381
Market cap at open: $100 billion
Coinbase did a "direct listing" instead of traditional IPO, allowing existing shareholders to sell directly to the public without raising new money.
Facebook (META)
May 2012IPO Price: $38 per share
First-day close: $38.23 (+0.6%)
Amount raised: $16 billion (largest tech IPO ever at the time)
Facebook's IPO was rocky—the stock fell to $17 within months. But long-term investors won: it reached $380+ by 2021 (10x return).
WeWork
Failed IPOPlanned valuation: $47 billion
What happened: IPO cancelled in 2019
After filing to go public, investors scrutinized WeWork's financials and questionable governance. The company pulled its IPO, CEO was ousted, and valuation plummeted to $8 billion.
Why Companies Go Public
Benefits of Going Public
- ✓Raise Capital: Get millions or billions for expansion, R&D, acquisitions
- ✓Liquidity for Early Investors: Founders and VCs can finally cash out
- ✓Brand Prestige: Being public increases credibility and visibility
- ✓Employee Stock Options: Attract talent with equity compensation
- ✓Currency for M&A: Use stock to acquire other companies
Downsides of Going Public
- ✗Expensive: IPO costs $50M+ in fees, lawyers, accountants
- ✗Loss of Control: Shareholders can pressure management decisions
- ✗Quarterly Pressure: Must meet Wall Street expectations every 3 months
- ✗Public Scrutiny: All financials become public, competitors see everything
- ✗Regulatory Burden: Must comply with SEC rules, quarterly reports (10-Q), annual reports (10-K)
How to Invest in IPOs
Option 1: Get IPO Allocation (Difficult)
Some brokers (Robinhood, Fidelity, Schwab) offer IPO access to retail investors. But allocations are limited and usually go to their best customers.
Requirements:
- • Account with specific broker
- • Meet minimum account balance (often $100K+)
- • Apply for each IPO (no guarantee you'll get shares)
- • If allocated, you get shares at IPO price (before market opens)
Option 2: Buy on First Day (Easier, Riskier)
Wait for the stock to start trading publicly, then buy shares like any other stock.
⚠️ Warning:
- • Stock often "pops" 20-50%+ above IPO price on day one
- • You pay the inflated market price, not the IPO price
- • High volatility—price can swing wildly in first weeks
- • Example: If IPO price is $50, it might open at $75
Option 3: Wait for Lock-Up Expiration (Safest)
Wait 3-6 months after IPO when insiders can sell. This often causes a price dip, giving you a better entry point.
💡 Pro Strategy:
Most IPOs underperform in the first year. Studies show buying 6-12 months after IPO often yields better returns than buying on day one.
IPO Red Flags to Watch For
🚩 Company Not Profitable
Many tech IPOs lose money. Check if there's a clear path to profitability or if they're just burning cash.
🚩 Too Much Hype
Media frenzy and FOMO can lead to overvaluation. WeWork had massive hype, then collapsed.
🚩 Insiders Selling Large Stakes
If founders are selling 50%+ of their shares in the IPO, they might lack confidence in future growth.
🚩 Complex Business Model
If you can't understand how the company makes money after reading the S-1, be cautious.
🚩 Recent Rapid Growth Before IPO
Companies sometimes "dress up" financials right before IPO to look better. Check for sustainability.
Common Questions
Do most IPOs go up on the first day?
Yes, most IPOs "pop" on day one (average 15-20% gain) because underwriters intentionally price them slightly below market value to ensure success. But this doesn't mean long-term success.
Can I lose money on an IPO?
Absolutely. Many IPOs drop below their IPO price within the first year. Examples: Lyft, Uber, Snap all fell 30-50%+ from IPO prices in their first year.
What's a SPAC vs traditional IPO?
A SPAC (Special Purpose Acquisition Company) is a "blank check" company that goes public first, then merges with a private company to take it public. It's faster and cheaper than traditional IPO but more risky.
Should I invest in every hot IPO?
No! IPO hype often leads to overvaluation. Studies show most IPOs underperform the S&P 500 in their first 3 years. Be selective and do your research.
Key Takeaways
- ✓IPO = Initial Public Offering, when a private company sells shares to the public
- ✓Companies go public to raise capital and provide liquidity to early investors
- ✓Most IPOs "pop" on day one, but long-term performance varies widely
- ✓Retail investors rarely get IPO allocations—usually have to buy on open market
- ✓Wait 6-12 months after IPO often yields better entry prices than day-one buying